Covid-19 Crash: Amusing behaviours encountered + updates

"Your blog is growing grass!" a reader J exclaimed over a Whatsapp chat as we exchanged updates on latest developments on the Covid-19. Sheepishly, I gave a weak excuse and later admitted that I have been lazy.

Indeed, my regular interactions have been reduced to just 2 small chat groups with some of my closest investor friends. Late February, the market caught many off guard as many are not sure what to make of the market tanking in our blank faces. Some bought in thinking it would rise back up as previous times last year.

Of course, this time is different. The crash finally arrived.

The tl;dr 5 min summary:

1. Background: This February-March 2020 market crash is probably the worst we've had in recorded history. It has been waiting to happen for sometime. In the Covid-19 pandemic and Oil price war, we've finally met the triggers that sparked the downward spiral. I do not think that this market crash will let up anytime soon, given that the Covid-19 is just about to reach it's peak in Europe and just starting in the US. There could be more room to fall.

2. KC encountered some amusing investor/ trader behaviours this crash:
- Behaviour 1: A few readers asking KC how to open CDP/brokerage accounts saying "We want to invest because the markets crashed!"

- Behaviour 2: One reader, without any prior investing knowledge or knowing anything plonked all his money into derivatives tanking substantial losses. (good luck) "All IN!" "High risk, High Gain!"

3. Personal Updates and thoughts:
- KC was busy from January to March due to run in of night class modules (3 days night classes per week). Exams plus assignments plus exams plus assignments... it's finally going to be over soon.
- KC is also working hard with new projects, new opportunities and responsibilities given at work.
- KC been saving cash since November 2019.
- Portfolio tanking a -15% loss at the moment.
- Some seasoned investor friends have shared with me that this period is a highly stressful period for them as this is truly an unprecedented black swan event. >30% loss over 2 weeks is quite heavy to stomach.

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The backdrop: A Market Wide Crash
Global markets plummeted since late February and have fallen about 30% off from its peak given the backdrop of 2 triggers:

1. Covid-19: An unknown Coronavirus that (probably) originated in China during late November 2019 sparked mass panic in a number of South East Asian countries before causing widespread panic similarly when the pandemic reached Europe eventually and US soil later on. Globally, businesses are suffering with some companies at the forefront of it (such as tourism, hospitality, airline companies). This is mainly due to a huge drop in consumption of goods and services globally out of fear and panic of the risks of contracting the virus.

Dow Jones index dropped about 30% from recent high.

Interestingly, the US market did not respond to monetary policies rolled out by the Trump administration nor the quantitative easing (QE) policies from Fed cuts. This was unlike previous round of QE when it seemingly propped up and supported the market and businesses alike.

2: Russia-Saudi Arabia Oil Price War: As an employee working in the Oil and Gas industry, I could say this has been an "accident" waiting for a long time to happen. We've all probably known for the longest time that Oil prices are artificially controlled with limits placed on production on the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

By U.S. Energy Information Administration - https://www.eia.gov/totalenergy/data/monthly/archive/00351705.pdf (Monthly Energy Review, May 2017, Figure 11.1a), Public Domain, https://commons.wikimedia.org/w/index.php?curid=3457602

Over the years, technology have improved such that we are now able to produce much more oil and more efficiently. Basic demand and supply dictates that without any intervention, market forces would drive the prices down.

Now, Russia and Saudi Arabia have picked quite an interesting time to have a go at each other with nobody wanting to back out from selling their oil. Both Russia and Saudi seem okay with trying to kill their competition by engaging in a price war. The result is that oil price is also down about 20%.

Is this going to stop soon?
With the market tanking in such a manner, I personally think it is unlikely that this would let up anytime soon. China seems to have walked out of the episode but over in Europe and US, panic is reaching an all time high.

The extent of devastation is evident in the sheer numbers of deaths.

From an economic standpoint of view: even if we manage to eradicate the virus tomorrow, the effects of the Covid-19 are far reaching and will have a lasting impact on the global economy. We have to be prepared to last for the long haul as investors because this looks like a prolonged period of downturn.

If China's spread lasted from late November 2019 to Mid March, the situation in Europe could carry another 2 months plus at least, and 3-4 months in US at the very least. This means we will have to look towards June to know if there is any chance of it turning around.

Amusing behaviours (encountered as an investor/blogger)
With the market tanking 30% over a matter of days in weeks, some readers finally decided to take action to open their investing accounts. While it is good that you finally take what many have been advocating to start investing, I would encourage new investors to remain cautious because we are now into uncharted territory.

"I want to invest because the market crashed!" one friend told me.

Anyway, I pointed them to resources on how to get started. I could sense that feeling of euphoria and enthusiasm that it seemed such a downer to ask my friend to be more cautious and learn the basics first before diving head in into the work of investing/ trading. I remember my own sense of excitement when I decided to start investing as well.

Well, at least even a lay man could tell what this stock market crash means. It is a 10 year one time golden opportunity to accumulate stocks on the "cheap". But, the challenge here is that there is some danger here.

Lack of capital and the trouble of bottom fishing

As new investors, I know too well that one of the main constraints is actually having a discipline towards saving: this is the pre-cursor to having capital to deploy. For budding investors, many of us do not have enough to deploy. This is because investments are ideally suitable only for money that we do not need immediately. (Meaning we are able to take a certain degree of losses on them). This is also known as the ability to hold, or holding power. We will not be forced to liquidate positions due to a lack of cash for our daily use.

This therefore requires some careful planning and objective goal setting. As a new investor I would say that the objectives boil down to these 3 points: (at least personally)

1. Having a discipline to save / finding more income
The crash is going to pass us by if we don't have any capital to deploy when it comes back up eventually. Most friends I know simply don't save enough. We are living it up and spending on items such as gaining travel experiences and entertainment. It's not too late to start planning to save a portion first before spending on what you want.

2. Minimising costs of investing
The most absurd thing I've heard from a financial planner friend is that :"If she can earn 6% for her client, it is only right for her to take 2-3% (as commissions)" As a former planner myself, I can tell you that many people who manage others' money out there are only interested in lining their own pockets. You will do yourself a service to learn how to invest at lower costs. Otherwise, you are just helping others to get rich.

3. Managing the downside risks and making calculated risks for potential gain
The crux message of this point is essentially risk management. You identify the potential hazards ahead of your investing journey and doing your best to mitigate them by evaluating the control measures you are going to take to limit your losses. For example, to invest in stocks, you would do well to educate yourself on how to evaluate stocks. Another way, of course is to jump in and find out later that you are swimming with in the sea with no life jackets.

I think one of my friends did a bad move
Recently out of the blue, one of my friends who asked me about how to start investing told me that he probably made a stupid mistake.

He told me that he started "investing" but is tanking some 30-40% loss when the week before I specifically warned that the market crash was going to get worse.

On further pressing, I discovered that he was "investing" in derivatives but do not understand the nature of derivatives and it being a leveraged tool. He thought that it was the same as stocks. In my opinion, this was probably the worst way one can start investing. Firstly, he did not understand the tool (derivative being used here) and how it works. Secondly, there is no plan, no nothing.

Just simply "High risk high gain, and ALL IN".

I questioned what is the rationale for using this derivative tool. He mentions that investing in traditional stock is far too slow. Using the derivative allows leveraging an "higher potential returns."

"Be greedy when others are fearful, and be fearful when others are greedy". 

At this point, I'm rather stumped for words. I wonder if there were more friends like this one who is plonking all his hard earned money this way. Luck seldom makes one rich, and if we depended on luck its more akin to gambling than anything else.

Please people, exercise caution and restraint. This is not like going to the supermarket and snatching what is available with the panic FOMO buys.

March Personal updates and thoughts
My night classes are finally coming to an end: I have no idea if I made it in the final assessment due to my hectic schedule from February to March. I will find out at the end of the month.

Work wise, I have been given new opportunities to shine at work and I'm devoting a huge time and effort to ensure so (which explains why I'm having less time here). However, due to the Covid-19, a chance to go overseas for a short stint has probably gone up in smoke. Over at my new company, news of retrenchment again is announced. Luckily this time, I am not affected. I checked with a few of my friends in the same sector and it was quite congruent that many are cutting people now given the bleak outlook ahead.

Portfolio wise: 

I've not added any more new positions since late last year and been keeping cash. Current invested amount is around $18,000 and the current value is around $14,000. I'm sitting on $30,000 cash pile but am hesitant to deploy it since it is partially earmarked as wedding planning fund.

Shocked, with trembling fear:
One of my closest investor friend who is arguably my most profitable trading/investing friend saw his profits from a few years earlier wiped out during the circuit-breaker weeks where the markets dropped 7% and were halted. He personally told me that this was an unprecedented move and it is certainly a highly stressful event for him.

If we cannot stomach those losses then we probably shouldn't be investing. It is perfectly fine if one does not invest: as long as you live within means and spend less than what you earn, technically you don't need to.

Stay Safe, Play Safe.

p.s. Special thanks to Pete for proof-reading. But there might still be some grammatical errors. :)

K.C.

If you like this post, you might like our facebook page as well. I'm also on Investing Note.

Related topics:
1. About K.C. What is my story?
2. My 3Cs to money/investing
3. Why you need to set aside money for savings first
4. Interview process cycle: How to increase your interview rates
5. My 2018 Year end review
6. I'm retrenched: 3 things to think about

7. Why I refuse to spend >15-30 minutes budgeting each month

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